Geoff Simmons says National is encouraging first home buyers to get up to their necks in debt

Geoff Simmons says National is encouraging first home buyers to get up to their necks in debt

By Geoff Simmons*

(Updated to correct the name of the author.)

The property market is New Zealand’s drug of choice – and Auckland and Christchurch are the chief junkies. Instead of trying to wean people off the housing market kick, National wants to help middle-class first home buyers get hooked.

New Zealand’s housing market is overheated – no one is arguing about that.

The best way to measure that is by comparing house prices with our income.

Across New Zealand, the average house price is 5.5 times the average household income.

In Auckland, that rises to a factor of 8, making it one of the most unaffordable cities in the world.

Only low interest rates have been keeping mortgage repayments affordable, a situation that won’t last forever. 

The house price boom in Auckland has hit first home buyers hard, a situation that was made worse by the Reserve Bank’s decision to restrict borrowing to those who could afford less than a 20% deposit.

The RB’s policy had no impact on investors who had plenty of equity after recent price increases. 

National’s response is to increase the first home buyer subsidy built into KiwiSaver.

For some time now first home buyers who are earning below $80,000 (or $120,000 if they are a couple) have been able to withdraw from their KiwiSaver accounts to pay the deposit on their first home, and get a top up (subsidy) from the Government as well.

National has now upped the government subsidy and increased the price limits of the homes that the subsidy applies to.

That subsidy is higher for newly built homes, in an attempt to encourage more building. 

Subsidy for the middle class

There are a number of problems with this policy. Firstly it is a decidedly middle class subsidy – it won’t help those that could never afford their own home. At a cost of $435m over four years is that really the best use of limited government money? 

Impact on house prices

The Opposition has claimed that this policy will simply stoke the fire and set house prices roaring further. National counters that by upping the subsidy for new building, they will increase the demand for new houses to be built.

Who’s right? And where are the builders anyway?

The short answer is that we don’t know.

All we know is that it first home subsidies haven’t worked in Australia. National is hoping things will be different here. 

Impact on affordability

Perhaps the most concerning aspect of National’s proposal is that they are encouraging first home buyers to get up to their neck in debt:

National gives the example of a couple in Auckland both earning $50,000 a year who have been in KiwiSaver for five years: they could withdraw $35,000 from KiwiSaver, receive a $20,000 new home grant, giving them a $55,000 deposit. For the Welcome Home Loan scheme they would need a 10 percent deposit, and so could borrow to buy a house costing up to $550,000.

This hypothetical couple would be paying a $500,000 mortgage on a combined gross income of $100,000. With long term interest rates now between 6-7% and heading upwards, this would means repayments are well above the level defined as unaffordable (where households spend more than 30% of their disposable income on housing costs). Is the answer to our house price crisis to help our young people saddle themselves with a lifetime of debt?

If housing is New Zealand’s drug, does this policy make National a pusher?

What are the real issues? 

This announcement, like those of most parties, does little to deal with the fundamental problems facing our housing industry. These are:

Tax policy turning a blind eye to the benefits owners get from housing.

While rental properties and farm are taxed as a business, the capital gains they receive are not considered taxable income. Equally important, the rental equivalent of the shelter provided to owner occupiers and the capital gains they receive are not taxed either. Given the tax advantages, who wouldn’t invest in housing if they have the money?

A directive to banks from the Reserve Bank to favour lending on mortgages over other forms of lending.

The Reserve Bank has tweaked around the edges through their higher capital requirements for low equity loans, but there is more to do. A radical rethink on taxing housing would help.

Local government distributes the costs of supplying services to new subdivisions across all rate payers.

People who want to live in newly developed subdivisions should face the full cost of their choice, not a lesser amount. It is often seen as ‘cheaper’ to build on the fringes, but if the full costs were included, they wouldn’t look so cheap. For example, developers should pay the full cost of the additional infrastructure on the fringes – including the transport links required for people to get to work. Inner city living would start to look more inviting. 

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This article was first published on the blog garethsworld.com and is re-published here with permission.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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17 Comments

'Drug of choice' i couldn't have phrased it better. The property market is the one thing I don't like about NZ. Most people have drunk the kool aid, sometimes all I hear from family and friends is "houses, houses, houses" almost enough to hound me into an assisted suicide.

So true!
 
One nearly hopes that this whole nonsense real estate market collapse asap so that people stop going on and on about it. 

Isn't it great when you go to a function with friends and somehow the topic of conversation always gets around to that damned property investment.The friends seem to have a smirk on their faces as they relay the story of how the invested so little and have made so much,All the while i am thinking no jobs created and very little tax paid why wouldn't you invest in property.It appears to be the only game in town unfortunately.

Any grants to FHB will push up the price of houses even further than they are now.
Helping the rightous poor is a big mistake .
Leave FHB homeless so that they have to continue renting.
That just  suits me fine .
 

I agree with Gareth , broadly , but the affordability aspect in relation to income is not a relaible measure .
The 30% spend on housing rule -of -thumb is not so applicable to NZ, as say Aussie, the UK or Canada
Here we have free education and almost free healthcare , Free this and free that and Working for Families pays the weekly grocery bill .
I also disagree that houses have become "unaffordable ".
If this were the case , then like Rolls Royces , few people would not buy them .
Instead we see masses of people at house auctions , people queeing out the door at the sales venue .
One needs to ask why is the market so bouyant with sales of houses down to a few days on the market .
Maybe many young Kiwi's do have savings, or some family money  , and Asians in particular often have large deposits , access to family money , syndicated money , and can often borrow offshore using offshore assets.
I do agree that the subsidy is aimed at the middle class , and one needs to ask why ?
We also know that subsidies distort the market where the prices quickly go up by the subsidy amount , just look at the Housing Insulation subsidy , it became a rort . 

Boatman, you should know better than to mention Rolls Royces infront of little BigDaddy
stolen ring any bells...
President of Property...

National are definately the debt pushers feeding the debt addiction.
Their policy inflates house prices further and will do little to increase supply.
GDP in 2000 $112B; 2014 $227B +100%
Mortgages 2000 $61B (54% of GDP); 2014 $189B +200% (83% of GDP)
We spend more than the far wealthier USA 60% GDP
Banks love the National Party ;)

We (I) made an error when publishing this piece. It was authored by Geoff Simmons and not Gareth Morgan. These details have now been corrected.

Until we tax capital gain as with income gain we will go nowhere. The banks love the current setup as people are prepared to capitalise yield to a low level as the gain is then tax free for many. Farming is the ultimate. I know people who bought a farm, sold 15 years later, $3 million   gain and not taxed. In that time they had community services card, kids got full funding through uni - no loans for them. One rural accountant I know now refuses to fill out community services card applications he is so sick of it.
same in housing accept virtually no yield, hold long enough, sell and no tax. Where else can you do this? 
Throwing more money into this fire will simply encourage others to get in as it is a guaranteed market rise. The young person again gives a baby boomer like me there kiwisaver savings plus some government money and they are leveraged to there nose. That's why I refuse to buy rentals I can make money but am screwing my children and there friends.

.... seems 'like the Gnats don't want it on their watch that the bubble bursts ... just as former Federal Reverse Chairman Alan Greenspan fed the US housing bubble , despite his own misgivings about " irrational exhuberance " ...... leave the ignomy of failure to the next guy , the " patsy " who follows in your footsteps ...
 
These grants were tried across the Tasman ( as everyone well knows ) , and led to property becoming even more unaffordable .... but let's not put the facts before the rhetoric so close to the election ...
 
... typical pork-barrel politics ....
 
May as well support an alternative party , both the main two are up to their necks in dirty tricks of one sort or another .... where's McGillicuddy when you need them , serious !

I think I'd rather have mortgage debt than money in kiwisaver it offers a level of protection against what the Polish Government have undertaken.
 
When the market for the basics like a roof over your heads attracts so much interference, manipulation etc then you know that someone else is benefitting from the lard.
 
When will NZ'ers finally awake from their slumber and realise how rigged the market is?
When will NZ'ers finally awake from their slumber and realise they have no constitutional rights?
When will NZ finally awake from their slumber and realise that our Government system is illegal?
When will NZ'ers start reading the Bill of Rights 1688 granted to them as of Right when NZ was settled and the Treaty of Waitangi was signed?
When will NZ'ers realise that most of the decisions, legislation and policies are illegal?
No NZ Government was ever able to change the Bill of Rights 1688.
Has the Law Society ever challenged the Govenment through the Courts over the  unconstitutional state of NZ's affairs?
Are all these so-called outstanding Law Society members outstanding for all the wrong reasons?
Then there are the Law faculties in our so-called wonderful Universities.....what are the teaching?
Why are NZ journalists unable to inform the public on the constitutional foundations of our country?
Why do some people only ever quote NZBORA and then omit the Bill of Rights 1688 and the 3 Articles in the Treaty of Waitangi? Why is there never any public debate of these issues?

 "this would means repayments are well above the level defined as unaffordable (where households spend more than 30% of their disposable income on housing costs). Is the answer to our house price crisis to help our young people saddle themselves with a lifetime of debt?"
Its has not been 30% for YEARS the banks dropped this form of lending criteria years ago because if you work it out you simply could not afford to buy a house on the average wage. I finished paying off the mortgage on 80% of my pay going into the house. No regrets you just have to suck it up for 15 years or pay rent for your whole life.
 

Correct Carlos67....sucking it up and paying it off is the only option available especially if your on wages/salary set income type of earings. That is the system and how it works.
 
I do have a problem with the fact that all the money I borrow doesn't actually exist so I am in effect creating that debt, not the banks. The banks get to charge interest on something that doesn't exist in the physical as it is only a paper entry of which the mortgage holder makes a promise to pay when taking on the mortgage instrument.
I would have no problems actually paying interest on any actual physical money that happened to be in the deal....but no-one can show me where the physical money is.

I thought it was the interest that doesn't exist and gets created out of thin air? I thought the money borrowed was underwritten somewhere (used to be gold)?
But then, I am notaneconomist either :)

Pouggey..this link might help to explain it to you.....read also the "original paper here" link inside the link below. There's a couple of short clips to watch.
Sir Mervyn King explains it well "When banks extend loans to their customers, they create money by crediting their customers accounts"......
http://www.positivemoney.org/how-money-works/how-banks-create-money/
 
I would prefer the right to create money in my own right........why should banks get preferentail treatment and benefit from the skills and knoweldge of others? There is only one reason we have regulation and that is to ensure that others can benefit somehow and the trouble is some fall through the gaps on the way.
 
I hear what your saying about the interest component...!!!
Everyone is getting a cut off your work..the Reserve Banks,,,,,the commercial banks.....
 
 

Man some of you have to whinge about everything. You whinge that house prices are too high, whinge that government don’t do enough to provide cheaper housing and now whinge because National has come up with a plan to help first home buyers into their own homes.
I think it is a great plan. For starters it helps the first home buyer. Isn’t that good thing? Assistance by the tune of up to $20k. What a gift!!! I wish I had that when I bought my first home. This isn’t necessarily just for middle class people either. Heck, even those in lower socio-economic situations will benefit from this too. And a $20k grant for them will be a massive boost as the value of house that they will possibly purchase will be lower so $20k could be half their deposit. How easy is that? Well the wingers will just keep winging but for anyone with enough sense to see the opportunity and grab it will be happy in their new home.
Is there a housing shortage? Well, this policy will also help to encourage new builds. Why whinge about that! It is a good thing. It will also create a lot more jobs in the trades which creates good employment for many of the people that may well be first home buyers themselves.
Yes people will need to take on some debt if buying their own home. That’s just the way it works. Partly because we are so slack at saving. We would rather buy a new fancy TV, computer, car or squander the money on drink and entertainment etc and so very little is saved. At least if someone takes on a mortgage they are forced to cut back on some of the toys for a while. Sure beats renting for the rest of your life though.

"Sure beats renting for the rest of your life though."
Really? That depends what is important in your life. If planting roots in suburban NZ is your goal, sure, do it. But what if you prefer mobility and life outside a white picket barricade? Typically the only NZers who really understand this are those who have spend considerably time outside NZ.  And I expect that they have greater awareness of the possibilities.